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  • invest2bfree invest2bfree May 3, 2012 9:56 AM Flag

    UPDATE 1-Brazil to take major step in cutting interest rates

    UPDATE 1-Brazil to take major step in cutting interest rates

    By Brian Winter

    SAO PAULO, May 3 (Reuters) - Brazilian President Dilma Rousseff wants to link returns on national savings accounts to the central bank's lending rate, local newspapers reported on Thursday, a risky and highly controversial move that would allow her government to continue cutting interest rates in coming months.

    Rousseff has made reducing interest rates a top priority as she tries to revive an economy that has been on the brink of recession since mid-2011. The benchmark Selic rate is at 9 percent, near historic lows for Brazil but exorbitant compared to rates close to zero in Europe and the United States.

    One of the biggest obstacles to bringing the Selic down further is the fixed rate of return for savings accounts, Brazil's most popular investment vehicle. The rate is currently set at about 6 percent annually, which once tax incentives and other factors are taken into account amounts to a de facto floor for the Selic at or around its current level.

    Rousseff plans to scrap the fixed rate and instead peg the return on savings accounts to as low as 70 percent of the Selic, Valor Economico and Estado de S.Paulo newspapers reported, citing unnamed sources. Valor reported that existing contracts on savings accounts would not experience any changes.

    A senior government official declined to confirm or deny the reports, and told Reuters that Rousseff would finalize the details on Thursday morning. The official spoke on condition of anonymity because discussions were still ongoing.

    The finance ministry did not immediately return a call for comment on the newspaper reports.

    The proposal, which will likely need congressional approval, carries enormous political and economic risks and amounts to a fundamental reengineering of the basic pillars of Brazil's financial system. Brazil's currency and interest rate futures markets have both been highly volatile this week as investors try to account for the changes.

    "A historic decision," Andre Guilherme Pereira, an economist for Gradual Investimentos, wrote in a note to clients on Thursday. "We wish all the luck in the world to the government. They're making a really, really high-stakes bet."

    The real was about 0.3 percent weaker in early trade on Thursday at 1.929 per dollar. It has shed almost 3.5 percent of its value this year as investors anticipate that lower interest rates will make Brazilian assets less attractive.

    The central bank cut the Selic rate 75 basis points last month, and it is now down 350 basis points since August. In minutes from its latest monetary policy meeting, the bank left the door open to further rate cuts in coming months.

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